Krugman’s Blog 2/4/13

In one of Britain’s most dramatic modern archaeological finds, researchers here announced on Monday that skeletal remains found under a parking lot in this English Midlands city were those of King Richard III, for centuries the most widely reviled of English monarchs, paving the way for a possible reassessment of his brief but violent reign.

Some further thoughts inspired by the welcome hatred of the usual suspects toward yours truly. One quite common statement among the Austrianish horde is something along the lines of “It’s ridiculous to imagine, as Krugman does, that you can create real wealth by printing more pieces of paper.”

Well, it may be ridiculous, but it’s also true, under certain conditions — namely, when the economy is suffering from inadequate demand. And you don’t have to use highly abstruse reasoning to see this, either; all you need to do is think in terms of some kind of model, not necessarily of the mathematical kind. The whole point of the true story of the baby-sitting coop, which brings it down to a human scale, is that it’s quite possible for economies to get into a snarl that can be solved by printing more money, or having the government spend more.

I know that this is a conclusion many people hate. They really, really want to believe that bad things must have good causes — that if you are suffering from high unemployment and low output, it must be because there is something deeply wrong, probably the fault of liberals. But what was deeply wrong with the US economy in late 2008 that wasn’t true of the US economy in late 2007? Recessions happen, and any halfway plausible story about how they happen is likely to suggest that non-fundamental government interventions, like printing money, can make things better.

It’s important to emphasize the conditionality here. The haters love to claim that people like me view more demand, more money printing, as the solution to all problems. But of course that’s not true. Aggregate demand won’t solve a problem of low productivity, or inadequate productive capacity, or for that matter extreme inequality due to technology or market power. But it can solve certain problems, which happen to be the problems we have now.

The last post of the day was “Rate Expectations (Wonkish):”

FT Alphaville links to a puzzling piece by Maasaki Kanno, who argues that the relative success of Abenomics in Japan, so far, reflects a divergence in expectations between the currency and bond markets:

The key to understanding the success of Abenomics is the asymmetric response between the currency and the bond markets, which can be attributable to divergent inflation expectations. In the currency market, inflationary expectations rose among investors, mostly non-Japanese, while on the other hand the JGB market remains dominated by Japanese investors, whose inflation expectations appear more or less unchanged.

OK, I look at the breakeven inflation rate, which is a (rough) measure of bond market inflation expectations, and see a rather dramatic rise in expected inflation — around a percentage point since early last year. True, the rise predated Mr. Abe’s taking office, but it’s not too hard to imagine that markets were anticipating a change in policy. So what is Kanno talking about? Actually, he doesn’t say.

I hope that it’s not the fact that long-term JGB rates haven’t risen. Because you wouldn’t expect those rates to rise. Japanese short-term rates are up against the zero lower bound, and this puts a sort of squishy floor under long rates as well, which are held above zero by option value — short rates can go up, but not down. With long rates up against this constraint, you wouldn’t expect them to rise much as a result of expected inflation, and in fact they might even fall slightly if the Bank of Japan gets perceived as less ready to raise rates in future.

As I see it, there’s no puzzle at all here: the perception that the BoJ is going to be an easy-money institution in the future has raised expected inflation, reduced real rates, and depreciated the yen. And it’s all good news for Japan.

One Response to “Krugman’s Blog 2/4/13”

It’s to let go of failing institutions Mr. Krugman. The Japanese bond fatality curve is amusing. Historic consequences and the recession happens may in fact point to what we perceive is wrong and reality has another notion. Seemingly rational expectations have a way of going south. But Austrian penny pinchers have little to rest their weary bones upon except unilateral expectations of calamity. Whether tax laws or productivity the curve they rely on is not demand but instead a real rate of currency valued arbitrarily on limitless funds which of course is paradoxical. The baby coop is easy enough. And for that matter so is a flat tire. Although having watched Downton Abbey most Chicago quants won’t understand there is a jack in the trunk. Historic winds of consequence are so much easier to relate to when they’re in recent memory. Japan 1970’s to Reagan era defense spending to the cyclical decline of industrial manufacturing and mining to rates and taxes all spell models that no one can predict accurately with. So it is wiser to do as u do and stand aside and lend a hand to someone with a flat and let the hot air blow.